On August 7, 2006, SEC Chairman Christopher Cox announced that the SEC would not appeal the recent decision of the U.S. Court of Appeals in Phillip Goldstein, et al. v. SEC. This Goldstein decision effectively overturned the SEC’s 2004 rule requiring most advisers to hedge funds to count investors in the funds for purposes of determining if registration as an
investment adviser is required. Cox confirmed that the SEC would neither seek en banc review of the Goldstein decision, nor would it petition the U.S. Supreme Court for a writ of certiorari. Accordingly, the Court of Appeals decision became effective upon its issuance of a final mandate.
Now, Senator Jack Reed (D-R.I.) has introduced a bill which covers hedge fund, private equity, venture capital and other investment pool managers and requires them to register with the SEC. Under his proposal, only firms managing more than $30 million would have to register on the federal level; smaller funds would be regulated on the state level. This is not the first time a Senator or Congressman has introduced such a bill since 2006. In fact, they seem to be a all the rage these days.
Since 2006 many Senators have introduced or threatened to introduce their own bills calling for regulation of the hedge fund industry including Senator Grassley (R-I.A.), who seems particularly focused introducing a bill bearing his name. The Grassley initiative was a direct response to the 2006 D.C. Circuit Court of Appeals overturning the regulation imposed by the Securities and Exchange Commission requiring hedge funds to register. The federal courts said the Securities and Exchange Commission was going beyond its statutory authority. The initiative was never passed.
Another bill was introduced in Congress by Rep. Barney Frank (D., Mass.); Rep. Michael Capuano (D., Mass.); and Rep. Paul Kanjorski (D., Pa.) They hoped to not only amend the Investment Advisors Act of 1940, but more importantly, they wished to re-establish the authority of the SEC to regulate hedge funds, a power the commission gave itself in a controversial rule enacted in 2004, Goldstein. It too, was not passed.
The focus on Phillip Goldstein et al. v. SEC is understandable, as is the ruling overturning it. Hedge funds are a private business. The government, Federal or State, clearly over steps its authority when they attempt to regulate private industry. In fact, it was only after billions and billions of tax payer dollars were used to bailout some of our countries largest companies, that the board members, officers and shareholders of these public corporations finally ceded much decision making and control to federal officials. Again, these are public companies, forced to relinquish much control due to poor management which led to forced bailouts utilizing TARP loans.
There is no bailout for hedge funds. There are no TARP loans. After all, it would make absolutely no sense for the taxpayer to bailout private industry. That being said, the same holds true of government regulation in private industry- it makes absolutely no sense. In fact, many managers went through the onerous process of registration in 2004. Imagine lots of lawyers, accountants, paperwork and then a process of question and answer that can take weeks or months. Once one is registered, often, the SEC will come to your offices for a formal review. This too is costly, the taxpayer pays for the SEC employees and the rest is paid for by the investor via management fee. The process takes time, the most precious commodity in the fund business. A manager now spends time on reviewing paperwork, filling out forms and SEC responses, instead of focusing their undivided attention on performing for the investor.
Ironically, in the long run with the overturning of Goldstein we realize the SEC had indeed overstepped its authority. The managers precious time and investors funds as well as taxpayer money, was wasted fulfilling the reckless, lobbyist infused needs of politicians. These are the same individuals who were responsible for overseeing the markets. These men sat on the banking committees that were in charge of overseeing the regulatory agencies that are being blamed for everything from acts as incredulous as looking the other way on Madoff, to simply not admitting that they lacked the knowledge needed to understand the complex financial instruments they were in charge of regulating. No matter how you view it, this was a massive failure of the regulators and a direct reflection on certain members of Senate and Congress whose committees were directly responsible for oversight.
The failure did not take place within the hedge funds. In fact, many survive in spite of the failure of the system. The ones that have gated, the ones that have restructured and even those that have failed, most are victims of the system rather than that of a flawed strategy. The system that was supposed to regulate, and protect them, failed them. The government checks and balances that oversee the regulators failed them. Hedge funds have actually been a scapegoat of blame. They are far from responsible for any of our systemic issues, so why call for regulation? The industry has not been offered any TARP funds and has managed to survive without any help from the government, so why regulate them now? The taxpayers have already paid enough between the bailout and the flailing economy, spending more to regulate an industry that survived economic turmoil without incident, would simply be adding insult to injury.